Business Environmental Law and Transactional Support - Schnapf Law
Last month, the United States Environmental Protection Agency (“EPA”) issued its Action Plan to address concerns about perfluorooctanoic acid (PFOA) and perfluorooctanesulfonic acid (PFOS) which have increasingly being detected in drinking water systems. The action plan has the potential to significantly increase liability for manfacturers and users of products containing or treated with these compounds..
What are PFAS and How Are They Used?
PFOA and PFOA belong to a class of approximately 4,700 synthetic chemicals known as per- and polyfluoroalkyl substances (PFAS). Although domestic production of PFOA and PFOS ceased in 2015, these chemicals are still manufactured in other countries. Indeed, China, India and Russia have now become leading manufacturers of these chemicals. However, stocks of PFOA and PFOS purchased before the phase out may remain at many facilities and companies have been replacing PFOS and PFOS with other substances that share many of the same chemical properties
PFAS have been used in coatings that are used to impart water and grease resistance in a wide variety of consumer products such as non-stick cookware, clothing, upholstery and carpeting, sandwich wrappers, pizza and other takeout boxes, single-use paper plates, microwave popcorn bags, candy wrappers, and personal products (e.g. shampoo, sun screen and hand-cream).
PFAS have also been used in a wide variety of industries including aerospace, automotive, construction, electronics and photographic industries, semiconductor manufacture, performance plastic coatings, hydraulic fluids, car wash/wax finishes, electroplating mist suppressants, lubricant additives, molded-rubber formulations, inks, varnishes, waxes, lubricants, other cleaning agents, and pesticides as well as firefighting foams.
PFAS easily dissolve in water and can migrate significant distances in groundwater. They are also very stable and so persistent in the environment that PFAS have been coined “forever chemicals. When they do undergo degradation, PFAS usually form other PFAS compounds.
Once thought to be safe, PFAS have been linked to adverse human health effects including low infant birth weights, cancer and thyroid hormone disruption at low-levels of exposure. Even though PFAS have been in use since the mid-20th century, there is limited toxicity information for the vast majority of these chemicals. The exposure pathways, populations exposed, and levels of exposure are also not well understood.
What is known is that PFAS are readily-absorbed and bioaccumulate. Unlike another ubiquitous contamination, PCBs, which tends to be stored in fatty tissue, PFAS primarily accumulate in blood serum. Studies show that humans do not metabolize PFAS nor does the human body excrete the substances very rapidly. Thus, it may take years for the human body to rid itself of PFASs. Indeed, prior studies have found PFAS in the blood serum of 98% of people tested.
Potential exposure routes include:
- Drinking contaminated water
- Eating fish from contaminated water bodies;
- Eating crops grown in contaminated soils (e.g. agricultural land treated with biosolids from wastewater treatment plants);
- Infant consumption of contaminated breast milk;
- inhalation of contaminated air;
- Inhalation of house dust containing PFCs from treated clothes or carpets; and
- Direct contact with consumer products that have been treated with PFCs or which contain residuals from a manufacturing process.
PFAS in the Environment
The universe of sites potentially contaminated with PFOA and PFOS is stunning. They have not only been found at sites where the chemicals were manufactured but also at facilities using PFAS products to manufacture other products (secondary manufacturing facilities). Extensive groundwater contamination has been found at or near airports, military sites and civilian fire training areas where aqueous film-forming foams (AFFF) has been used to extinguish fires, for firefighting training and in fire suppression systems.
Because of their widespread use, PFAS have been detected in all environmental media including ambient and indoor air, soil, sediments, surface water and groundwater. The leading source of groundwater contamination is believed to be releases associated with AFFF. Other common sources of PFAS contamination include leachate from municipal solid waste landfills where products such as clothing or carpet coated with PFAS were disposed, wastewater discharges containing PFAS from publicly owned treatment plans or discharges from industrial or commercial facilities into septic systems and other Class V UIC program wells, contaminated stormwater into dry wells, application of wastewater sludges on land as well as aerial deposition of PFAS-contaminated particulates.
A 2016 study published Environmental Science & Technology Letters found PFAS at the minimum detection levels in 194 public water supplies in 33 states serving 16 million people. 66 public water suppliers had at least one water sample that measured at or above the EPA recommended limit. In 2017, the Department of Defense found 564 public or private drinking water systems with PFAS above the EPA recommended level. A 2018 study of PFOS and PFAS concluded that 1,500 drinking water systems serving 110 Americans may be contaminated with PFOS/PFAS
Proposed Safe Drinking Water Act (SWDA) Regulation
Under the SDWA, EPA may adopt enforceable Maximum Contaminant Levels (MCLs) which is the highest level of a contaminant that is allowed in drinking water based on health risks, cost and technical feasibility. While EPA has not adopted MCLs for PFAS, the agency, EPA issued a lifetime Health Advisory Level (“HAL”) of 70 parts per trillion (“ppt”)-the equivalent of 3 ½ drops in an Olympic swimming pool
HALs are nonbinding guidance that identify the concentration of unregulated contaminants in drinking water at which adverse health effects are not anticipated to occur over a lifetime. HALs may be used by state and local officials to evaluate risks and determine actions for reducing risks posed by unregulated contaminants in public drinking water systems.
By way of comparison, the Agency for Toxic Substances and Disease Registry (ATSDR) issued an updated Toxicity Profile for Perfluoroalkyls in 2018 which revised the minimal risk level (MRL) for PFOA and PFOS. An MRL is screening levels that represents the estimated amount of a chemical a person can eat, drink, or breathe each day without a detectable risk to health. The intermediate oral (15 to 364 days) MRL for PFOA was revised to 0.000003 mg per day and 0.000002 mg per day for PFOS.
Pursuant to the under the third Unregulated Contaminant Monitoring Rule (UCMR 3) issued in 2012, EPA required certain water systems to monitor for six PFAS . The agency has also used its emergency authority under section 1431 of the SWDA to issue administrative orders for several sites that have impacted drinking water. In 2018, EPA issued a guidance document to its regional offices encourage more widespread use of section 1431 authority to issue either unilateral administrative orders or administrative orders on consent for injunctive-type relief. To use its 1431 authority for contaminants without an MCL, the agency must establish that a contaminant is:
- “present or likely to enter” a public water system or underground source of drinking water
- “presents or may present an imminent and substantial endangerment” to human health, and
- state or local authorities have not sufficiently acted to protect the human health. Unlike other SWDA enforcement authorities
Under its action plan, EPA hopes to issue maximum contaminant level (MCLs) for PFOA/PFOS. The process of developing MCLS is complex and could take several years to complete.
EPA intends to propose nationwide monitoring for other PFAS compounds in drinking water under its fourth UCMR. The agency also considering developing water quality criteria for PFAS and effluent limitations guidelines for certain industrial categories under the Clean Water Act.
States have historically relied on EPA to develop drinking water standards. However, several states have adopted or in the process of developing their own PFOA and/or PFOS standards. Vermont, Minnesota, and New Jersey have set levels of the contaminants that are lower than the EPA HAL while New Hampshire, New York, and California have proposed guideline levels that are lower than the EPA HALs. Some states have fish consumption advisories for certain water bodies where PFOS has been detected in fish while others are requiring leachate from municipal landfills to sample for PFAS and even banning use of PFAS in certain products.
Proposed Listing as CERCLA Hazardous Substances
PFAS are not currently regulated as hazardous substances under CERCLA. As a result, EPA currently has limited ability to use its CERCLA authority to address releases of PFAS.
Under section 104 of CERCLA, EPA may conduct removal actions to address releases of “pollutants or contaminants” but the agency must make a finding that the release poses an “imminent and substantial endangerment” before it can use its removal authority. Even when EPA makes such a finding, it cannot seek cost recovery under section 107 since this authority is limited to response costs associated with releases of hazardous substances.
This lack of cost recovery has been a particular problem for communities near existing or closed military bases, airports, and firefighting training facilities since public water suppliers have had to incur wellhead treatment costs, provide alternate sources of drinking water or extend water service to residences with private wells. Illustrating the potential magnitude of this problem, the Department of Defense has identified 401 active and Base Realignment and Closure (BRAC) with PFAS contamination. EPA estimates that there may be hundreds of additional PFAS-contaminated sites that could warrant inclusion on the National Priorities List (NPL). Further exacerbating the problem for smaller communities is that the America’s Water Infrastructure Act of 2018 (AWIA) requires water utilities with fewer than 10,000 customers to begin testing for PFAS. Previously, only water systems serving more than 10,000 community customers had to sample for PFAS.
Because PFAS are not CERCLA hazardous substances, EPA cannot place sites on the National Priorities List (NPL) solely based on the presence of releases of PFAS. Similarly, EPA cannot currently use its authority under section 106 to issue unilateral administrative orders for PFAS contamination since that section is limited to releases of hazardous substances that may present an imminent and substantial endangerment. However, it can and has issued UAOs where PFAS are co-located with other hazardous substances.
EPA has been addressing PFAS where it is a secondary contaminant at NPL sites. For example, EPA has identified PFAS contamination at 29 NPL sites while 140 Federal Facility NPL sites have known or suspected PFAS contamination. EPA is actively involved at 58 of these Federal Facility NPL sites.
In some instances, the agency has sought relief under RCRA 7003 where PFAS contamination may pose an imminent and substantial endangerment. While this authority is not limited to impacted drinking water supplies, EPA can only issue orders for releases of “solid wastes.” In contrast, SWDA 1431 Section 1431 covers a broader universe of “contaminants”.
The second major regulatory development proposed by the EPA action plan is to list PFOA and PFAS as hazardous substances” pursuant to section 102 of CERCLA. The last time EPA used its section 102 authority to add a hazardous substances was 1989.
After listing, EPA would have a lower threshold for using its removal authority as it will only have to show there is a release of PFOA or PFOA and would be able to seek cost recovery. Listing PFOA and PFAS as CERCLA hazardous substances will would certainly expand the universe of potentially responsible parties such as municipalities that owned or operated closed landfills that accepted wastes containing PFAS or POTWs that disposed of sludge containing PFAS.
Listing could lead to EPA reopen previously remediated sites where PFAS may not have been investigated and EPA has reason to believe that prior remedial efforts did not address a risk of PFAS contamination. EPA may also use five-year reviews to require investigation of PFASs.
Of course, once PFOA and PFOS are listed as hazardous substance, public water suppliers and municipal landfills as well as private parties will be able to seek cost recovery or contribution for their response costs. Currently, these parties must rely on common law remedies or state statutory authorities if the response work was performed in one of the few states that have listed PFAS as a hazardous substance under the state superfund law.
EPA also plans to establish interim groundwater cleanup recommendations for PFAS-contaminated sites. Presumably, state standards could serve as “applicable or relevant and appropriate requirements” (ARAR) which means PRPs could be faced with different cleanup standards in different states.
Some states are now requiring that parties to sample for PFAS during remedial investigations at regulated sites even if there is no evidence that PFAS compounds were used or released at the site.
Toxic Release Inventory
Under the Section 313 of the Emergency Planning and Community Right-to-Know Act (EPCRA), certain facilities in different industry sectors must report annually how much of each chemical is released to the environment and/or managed through recycling energy recovery and treatment. The information submitted by facilities is compiled in the Toxics Release Inventory.
Currently, no PFAS chemicals are included on the list of chemicals required to report to TRI. However, the EPA is considering whether to add PFAS chemicals.
Like Asbestos, PFAS were once touted as a miracle substance. It now seems that this former miracle substance will also create enormous liability for manufacturers and users of these products.
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The New York State Brownfield Cleanup Program (BCP) has demonstrated how tax incentives can stimulate the development of contaminated properties. Now that the federal Internal Revenue Service (IRS) has designated over 8,700 Qualified Opportunity Zones (QOZs), contaminated sites in low-income areas across the United States may be able to benefit from this new federal tax incentive program.
The QOZ program was created as part of The Tax Cuts and Jobs Act of 2017. It is designed to spur investment in low-income and rural communities by allowing taxpayers to defer and potentially reduce taxes on capital gains. According to some estimates, the QOZ program could unlock an estimated $6.1 trillion in private capital investment towards distressed communities across the country. Even if only a fraction of this amount is ultimately invested, the QOZ program has the potential of becoming one of the largest community development initiatives in history.
In 2018, the Treasury Department and the Internal Revenue Service (IRS) issued proposed proposed regulations and a Frequently Asked Questions page for the QOZ program, which were supplemented by a Revenue Ruling. 513 of the QOZs are located in New York State. New York City has 306 of the QOZs with 94 in the Bronx, 124 in Brooklyn, 61 in Queens and 35 in Manhattan.
Like any tax incentive, the QOZ program is extremely complex so potential taxpayers should consult tax professionals before participating in these investment vehicles. The proposed regulations generated over 149 comments and questions remain if QOZ program needs to be further tweaked to facilitate brownfield projects. Following is a big picture description of the QOZ program and questions about how it may interact with brownfield projects.
The centerpiece of the opportunity zone legislation is a new type of investment vehicle called a Qualified Opportunity Fund (“QOF”) which can be organized as a corporation or a partnership. A taxpayer can invest the proceeds from a capital gain from the sale of nearly any asset (business, real estate, stocks, bonds, etc.) in a QOF and receives either stock or an interest in the QOF.
There are three basic types of tax benefits that are available to QOF investors.
Deferral of Capital Gains Tax – a taxpayer who has an investment that has appreciated, can postpone or defer 100% of capital gains taxes by investing a gain realized from a sale or exchange into a QOF within 180 days of the sale or exchange of stocks, mutual funds, or other investments such as sale of real estate or a business. The capital gains tax will be deferred until the date QOF investment is sold or December 31, 2026, whichever is earlier.
Reduction of Capital Gains –a taxpayer who invests in a QOF by December 31, 2019 will be able to reduce the taxable portion of its capital gains depending on how long the funds are held in the QOF. For capital gains held in an QOF for at least five years, the taxpayer will only be required to pay tax on 90% of the capital gain (in tax parlance, the investors’ basis on the original investment is increased 10%). If the funds remain in the QOF for two more years (total of 7 years), the taxpayer will only have to pay tax on 85% of the capital gain.
No Tax on Capital Gains- A taxpayer holding the investment in the QOF for at least ten years will not have to recognize any gain (i.e., pay capital gains tax) on the post-acquisition economic appreciation in its QOF interest so long as the taxpayer disposes of the investment prior to January 1, 2048. However, the taxpayer will still have to pay the deferred reduced taxes on the initial gain.
Questions About Real Estate Investments and Brownfield Projects
The proposed QOZ regulations provide that a QOF may invest in real property provided the “original use” of the property must commence with the QOF or the QOF must “substantially improve” the property within 30 months of acquisition.
“Original Use” Test
The enabling legislation did not define the term “original use. Revenue Ruling 2018-29 addressed the application of “original use” to a scenario where a QOF purchased a property with an idled factory building that the QOF intended to convert to residential rental property. The IRS concluded that the “original use” test was not applicable to the factory building because its use did not commence with the QOF even where the QOF intended to materially change the building’s use. However, it was possible that the redevelopment project could still qualify for the QOZ if the QOF satisfied the substantial improvement test (see below).
In the comments to the proposed rule and the recent public hearing, stakeholders urged IRS to clarify its regulations that if a building is unused or vacant for a significant period of time, a new investment in the building should be considered an original use for purposes of qualifying as Opportunity Zone property.
The EPA Office of Brownfields and Land Revitalization (OBLR) submitted a comment requesting that “original use” be redefined so that it applies to properties that meet the CERCLA definition of brownfield sites, properties that contribute to blight or create barriers to economic vibrancy due to prolonged vacancy or underutilization, that are vacant for at least one year or that have been foreclosed and held by a local government or land bank. EPA further suggested that the underutilized test apply to the entire property or to “a portion thereof … which is used only at irregular periods or intermittently.” According to EPA, this would help facilitate redevelopment at partially shutdown facilities.
“Substantial Improvement” Test
The proposed regulations provide that a QOF will be deemed to have substantially improved the property if it invests an amount equal to at least 100% of the cost basis (i.e. purchase price) of the property over a 30-month period. The Proposed Regulations and the QOZ Revenue Ruling clarify that the substantial improvement calculation only considers the cost basis attributable to the building(s) on the property (e.g. portion of the purchase price allocated to the building) and excludes the cost basis attributable to land.
At the recent public hearing, stakeholders asked IRS to extend the 30-month period for substantially improving a property because of the time it takes to obtain entitlement and regulatory approvals. Some commenters suggested the IRS create separate pre-development and construction periods. Without such an extension, stakeholders expressed concern that investors would be forced to invest in existing projects that are already entitled and that owners of those projects would likely charge a premium that may offset much of the tax benefit, thereby discouraging the very investments the QOZ program was designed to attract.
In written comments, EPA asked the IRS to extend the 30-month period for completing improvements because of the time it takes to complete demolition of existing buildings, excavation, cleanup and grading and other site preparation work.
EPA also suggested that funds applied to environmental assessment and remediation should be included when calculating if the developer complied with “substantial improved” test.
In addition, EPA requested IRS to allow gains realized from the sale of remediated property to be carried over into another QOZBP. EPA said this would allow an investor to sell a property it remediated to a vertical developer and allow the investor to reinvest the proceeds in another QOZBP
It is unclear how the “substantial improvement” test applies to the purchase of raw or vacant land. The proposed regulations had reasoned that that excluding the cost basis of land from the substantially improved calculation would facilitate repurposing vacant buildings in qualified opportunity zones. However, the IRS requested comments on whether vacant real property that is productively utilized after some period of abandonment could qualify as QOZBP. Specifically, the IRS asked:
- Should some period of abandonment or under-utilization of tangible property erase the property’s history of prior use in the opportunity zone?
- If so, should such a fallow period enable subsequent productive utilization of the tangible property to qualify as “original use”?
- Should the rules appropriate for abandonment and underutilization of personal tangible property also apply to vacant real property that is productively utilized after some period?
- If so, what period of abandonment, underutilization, or vacancy would be consistent with the statute?
It is anticipated IRS will address or clarify these issue when it issues revised proposed regulations in the upcoming months
Christmas arrived early for two environmental consulting firms when a federal district court ruled in Bank United, N.A. v. Merritt Environmental Consulting Corp, 2018 U.S. Dist. Lexis 214448 (S.D.N.Y. 12/20/2018) that a lender had waited too long to file a complaint against the consultants for failing to identify radioactive contamination in a phase 1 environmental site assessment. The outcome was based on provision of the New York statute of limitations (SOL) that allows breach of contract actions to be governed by the shorter for professional malpractice SOL.
Because the court granted the defendants’ motion to dismiss, the evidentiary record is not well-developed. The briefing was focused on which statute of limitations should apply. We have used facts from the briefs, from a related lawsuit filed by the property owner/borrower against a variety of potential responsible parties in 105 Mt. Kisco Associates v Caraozza et al, 2017 U.S. Dist. Lexis 47855 (S.D.N.Y. 3/30/17) as well as information from publicly-available databases.
During World War II, the property that was subject to the BankUnited mortgage was part of a nuclear refinery that was owned and operated by Canadian Radium and Uranium Corporation (CRU). The refinery extracted radium and polonium from the uranium residues for use by the Manhattan Project. After World War II, CRU shifted to producing commercial-grade radium from instruments and watch dials.
Apparently, CRU had a sloppy operation which caused extensive radiological contamination. Radiological surveys conducted by the Atomic Energy Commission (“AEC”) in 1952 and 1956 identified “significant radiation levels, removable contamination and airborne radioactive material concentration” In the late 1950s, CRU pled guilty to charges of allowing three employees to be overexposed to radiation. CRU was ordered to remove radioactive waste within the buildings but this work did not involve any soil remediation.
In 1966, the Mt. Kisco Urban Renewal Agency (“MKURA”) acquired the CRU facility, decontaminated and demolished the structures, graded the site and constructed a new road where one of the CRU buildings. The contaminated building materials were disposed off-site at the Croton Point Sanitary Landfill. Grading activities spread contaminated soils throughout the former CRU facility.
In the 1970s, the MKURA conveyed the property to the Village of Mt. Kisco (“Village”) which, in turn, transferred the CRU facility property to a private developer who subdivided the parcel and constructed three buildings. From the mid-1970s to 2012, a series of lumber businesses owned and operated the property with a street address of 105 Mt. Kisco Avenue.
In 1979, the Westchester County Department of Health (WCDOH) performed a limited radiological survey. Because the highest dose rates were found in an area surrounded by a high chain link fence that was not used by the public, the WCDOH concluded there was no public health risk but forwarded the radiation survey to the radiation branch of the federal Environmental Protection Agency (“EPA”), the New York State Department of Environmental Conservation (“NYSDEC”) and New York State Department of Health (“NYSDOH”).
In 1987, the former CRU facility was evaluated for inclusion on the Department of Energy (DOE) Formerly Utilized Sites Remedial Action Program (FUSRAP) list. DOE determined the former CRU facility was not eligible for the FUSRAP program because it had been commercial operation that had not been under the jurisdiction of DOE’s predecessor-AEC
After NYSDEC became aware of the FUSRAP evaluation in 1993, the agency asked NYSDOH to conduct a survey of the former CRU site. The survey detected elevated levels of gamma ray and radon levels at the site owned and occupied by Richard’s Home Center and Lumber, Inc (RHCL). Radon levels inside RCHL were higher than average for residential structures in the Village. The NYSDOH advised that further construction on the RHCL parcel should be curtailed until more data was available to assess the extent of the contamination.
Between 1993 and 1995, the federal Environmental Protection Agency (“EPA”) conducted a preliminary assessment and site inspection under the federal Superfund program. Although “hot spots” of elevated radioactivity exposure rates were noted, EPA concluded the site was not a candidate for the National Priorities List. The CRU facility was archived the on the CERCLIS site.
In July 1998, the NYSDEC conducted a comprehensive radiological survey of the former CRU plant to evaluate the extent of the remaining radioactive contamination and help the Village determine if land use should be limited. NYSDEC found that highest levels of radium-contaminated soils were present under the parking lot and outside storage of the RHCL parcel to a depth of about four feet. NYSDEC suggested the property owners consider removing the most impacted soils and that no soil excavation should occur until the parcels are fully characterized.
In September 2013, EPA engaged Weston to perform a site reassessment investigation. Weston collected outdoor gamma screening levels in the outdoor sheds and other storage buildings at the RHCL property but RHCL did not allow Weston to collect indoor gamma level screenings. The highest gamma readings were in the rear of the RHCL parcel. Weston returned in November 2013 to collect soil samples.
The Phase 1 Report and ESA Desktop Review
RHCL went into default on its mortgage with Community Mutual Savings Bank (CMSB) in 2012. The principal of RHCL, Paul Carazzo, and a local developer, Mark Stagg, formed a new business venture whereby RCHL sold the property to Amanda Lane LLC, an entity owned by Stagg. Amanda Lane LLC assumed the obligations of the CMSB mortgage. The two men then formed two LLCs– 105 Mt. Kisco Associates LLC and NY Stone and Landscape Supply (NY Stone). 105 Mt. Kisco was to acquire the land from Amanda Lane and then lease it to NY Stone to operate a masonry and lumber store.
To facilitate the transaction, 105 Mt. Kisco Associates LLC applied for a $3.25MM mortgage from BankUnited. In November 2013, BankUnited retained Merritt Environmental Consulting Corp (MECC) to perform a Phase I report. In discussing the Sanborn Maps for 1932-1949, the MECC Report stated that the southern portion of the property contained a lumber shed, an auto sales and service facility, and a woodworking facility while the northern portion of the property contained commercial and residential buildings. The report not only failed to id not indicate that the parking lot of the RHCL parcel had once been a part of the CRU facility but the section titled “Historical Use Information on Adjoining Properties” failed to mention CRU. However, the EDR database search identified the CRU facility as a hazardous substance waste disposal site (HSWDS) within1/8 mile from the Property. MECC recommended a phase 2 but it was for the purpose of assessing impacts from former petroleum tanks that had been identified on Sanborn maps. MECC did not discuss the possibility that the RHCL parcel was potentially impacted with radiological contamination by the former CRU plant
In March 2014, BankUnited retained Lender Consulting Services (LCS) to confirm that the MECC phase 1 satisfied the ASTM 31527-05 standard so that the bank could qualify for the CERCLA innocent landowner. The briefs indicated that LCS had done this work pursuant to a master services agreement for performing phase 1 reports, not simply reviewing reports for ASTM compliance.
BankUnited closed on the mortgage on March 20, 2014 and required a $40K escrow to remediate any potential impacts from the historic petroleum storage tanks identified in the MECC Report.
In June 2014, Weston issued a Site Reassessment Letter discussing its 2013 investigation. Weston reported that soil samples from paved and unpaved areas of what was now the NY Stone premises had elevated levels of radium, contaminated sediments in a drainage ditch that received stormwater runoff from the property and that there was a potential for groundwater contamination because of the proximity of the contaminated soil to the water table.
In June 22, 2015, the EPA, NYSDEC and NYSDOH met with the Mt. Kisco Associates to discuss the contamination. EPA advised the property owner that a cleanup was required. EPA commissioned Weston to conduct a Removal Assessment which included yet another radiological survey.
The August 2015, Weston issued a Removal Assessment report which found radon levels in excess of EPA Site-Specific Action Levels (“SSALs”) in the main building and in soil samples. 105 Mt. Kisco Associates did not notify BankUnited of the EPA investigations or that it had filed a lawsuit against potentially responsible parties including MECC until November 16, 2015. 105 Mt. Kisco Associates advised the bank that its consultant estimated the cleanup costs could range from $4MM to $30MM.
Beginning in April 2016, EPA engaged Weston to perform additional investigations. The Weston Phase II Report found elevated levels of alpha and beta particles, radium, bismuth, lead, and thallium.
On December 10, 2016, 105 Mt. Kisco Associates defaulted on its mortgage. Reasoning that foreclosure was not a viable remedy because of the presence of the radioactive contamination, BankUnited entered into a forbearance agreement on May 9, 2017 whereby the bank agreed to accept payments of interest while it contemplated its options. BankUnited subsequently commissioned an appraisal that determined that the property had “little to no value” because of radiological contamination and estimated cleanup costs. Indeed, the appraisal concluded stated that in its “As-Is” condition, the property had a zero value.
The Bank Litigation Against the Consultants
On July 13, 2017, 42 months after the loan closing and 20 months after it was notified of the contamination by its borrower, BankUnited filed a complaint against MECC, LCS, and their insurers. The complaint asserted breach of contract, professional malpractice, negligent misrepresentation and declaratory action against the insurers.
Under the New York statute of limitations (SOL), breach of contract claims are generally subject to a six-year statute of limitations while actions for professional malpractice must be commenced within three years. The defendants filed a motion to dismiss the breach of contract and misrepresentation claims on grounds that they were merely duplicative of professional malpractice claim. The defendants also argued that the professional malpractice count should also be dismissed because the complaint was brought after the three year SOL had expired.
The court began its analysis by noting that the New York State legislature amended the professional malpractice SOL in 1996 in response to a line of cases that applied a six-year breach of contract SOL to nonmedical malpractice claims. Prior to the 1996 amendments, the applicable SOL in a nonmedical malpractice action depended on the proposed remedy, not on the theory of liability. The 1996 amendment provided that where the underlying complaint claims there was a failure to utilize reasonable care or where acts of omission or negligence are alleged, the applicable SOL will be three years regardless of the theory of liability.
The court noted that the breach of contract count claimed MECC and LCS failed to act “‘in a manner consistent with that level of care and skill ordinarily exercised by other professional consultants under similar circumstances at the time the Services are performed” and by failed to perform the ESA in accordance with ASTM Standard E 1527-05. Therefore, the court held that the truncated professional malpractice SOL applied to the breach of contract count so long as MECC or LCS qualified as “professionals”
The court then turned the question of who is a “professional” for purposes of the professional malpractice SOL. BankUnited claimed the individuals who performed the work for MECC and LCS did not qualify as professionals because they did not hold professional licenses. The court rejected this argument, explaining that the New York Court of Appeals has held that the meaning of “professional” for purposes of the SOL was to be guided by:
“[t]he qualities shared by such groups” as lawyers, doctors, architects, engineers, and accountants, which qualities include extensive formal learning and training, licensure and regulation indicating a qualification to practice, a code of conduct imposing standards beyond those accepted in the marketplace and a system of discipline for violation of those standards. Additionally, a professional relationship is one of trust and confidence, carrying with it a duty to counsel and advise clients.”
The court said the allegations in the breach of contract count resembled many of the criteria in the passage from the Court of Appeals opinions. Examples the court found instructive were that complaint asserted the defendants were bound by applicable professional standards set forth by ASTM E1517 and failed to act “with the skill ordinarily exercised by professional environmental consultants”. Moreover, the complaint stated that plaintiff’s relationship with MECC and LCS was one of “trust and confidence” and that the defendants were hired to “counsel and advise”. In addition, the court said that environmental consultants performed a duty analogous to a real estate appraiser — a vocation that has been held to qualify as professional under the professional malpractice SOL.
BankUnited also argued that the fact the defendants satisfied the definition of “Environmental Professional” for purposes of the EPA All Appropriate Inquiries rule did not mean they were a professional for purposes of the professional malpractice SOL. However, the court found that the requirements to satisfy the AAI definition was the kind of extensive, albeit informal, training articulated by the New York Court of Appeals
Thus, the court found the defendants met the definition of a professional and that the truncated three-year SOL for professional malpractice applied to the breach of contract action.
Turning to the negligent misrepresentation claim, the court noted that claims for negligent misrepresentation are subject to a three-year SOL unless the claim was based on actual or constructive fraud which are governed by a six-year SOL .The court said plaintiff did not plead actual fraud but suggested it pleaded constructive fraud based on “‘the existence of a fiduciary or confidential relationship between the parties. The court explained that the plaintiff’s only support for its constructive fraud claim “was a single conclusory sentence” that MECC had a special relationship with BankUnited because MECC and its staff held themselves out as ‘Certified Environmental Specialists.” However, the court said that it could find any authority for the proposition that “Certified Environmental Specialists” are in a special relationship with their clients to justify imposing additional obligations on them. Because the only misrepresentations alleged in the complaint were the failure to uncover the conditions that Plaintiff alleged MECC and LCS would have found had they performed up to professional standards, the court found the negligent misrepresentation claim “stand[s] in the shadow of negligence” rather than in the “shadow of fraud.” In the absence of any plausible claim of constructive fraud, the court ruled the three-year SOL applied to Plaintiff’s negligent misrepresentation claims.
Plaintiff argued that even if its claims were subject to a three-year SOL, these claims did not accrue until BankUnited discovered the radioactive condition on the Premises, or, alternatively, that the SOL did not begin to run until the bank suffered damages, which it alleged was either when the contamination became public through the 2015 EPA report or the series of news articles reporting on the conditions of the premises in 2016.
However, the court held that the discovery exception applied to exposure to latent contamination and the bank had not alleged such injury. Because the bank did not allege that conditions became more dangerous after the closing and did not plead a latent, exposure-induced harm, the court rules the discovery rule did not apply and there was no ground to adjust the accrual date of Plaintiff’s claims.
The bank also claimed that the SOL did not start to run until it sustained an actual injury which it was when the Premises was rendered worthless. A claim for professional malpractice accrues when the malpractice is committed or when all the facts necessary for the cause of action have occurred and an injured party can obtain relief in court. In this case, the court found that the SOL began to run when the MECC and LCS delivered their reports and the bank had relied on them to close the loan.
Because Plaintiff’s breach of contract, professional malpractice, and negligent misrepresentation claims accrued by March 20, 2014 and the complaint was not was commenced until July 13, 2017, the court ruled the banks claims against the consultants were barred by the SOL
The New York SOL is unusual. In another state, the breach of contract count would have survived, the parties would have proceeded to discovery and we might have found out why the phase 1 failed to discover the site’s atomic legacy. In any event, the case serves as a lesson to lenders to make sure they understand the applicable state SOL when determining how to proceed with a defaulted loan.
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